The financial situation in Greece has been making headlines around the world as the situation came to a melting point recently; but what is really happening? The big picture summary is that Greece has taken on too much debt and is not able to pay it back. Just like when a person or company is unable to pay their debts, there are consequences. In this case the possible consequences could be Greece being removed from the European Union and going into default.
How this happened in the first place is a good question. Some sources say that part of the reason was “creative” book keeping by various accountants, which hid the actual amount of debt that Greece had. The story is that the amount of debt Greece had in 2001 was concealed which allowed them to stay in the European Union and as such gave them access to large amounts of debt which they could not afford.
Having Greece default on their loans and removing them from the European Union would have negative implications for both Europe as well as Greece. As with a person, if a country goes into default they will not have access to lending from the banks. As such, Greece would have to become completely self-reliant and most likely their currency would become very inflated, to a detrimental position. The total GDP of Greece makes up only 1.3% of the European GDP so removing that from the big picture would most likely not throw the EU into turmoil. Having all of the outstanding debt Greece owes annulled could have further reaching complications for lenders – the other economies apart of the EU.
The below infographic shows where Greece has their debt.
Some efforts have been made to maintain the status of Greece in the EU, France and Italy have been driving this effort, trying to provide some relief to their situation. Germany has been drawing the hardest lines saying that they do not want to see any further financial aid given to the country. The agreement reached recently was for additional financial aid to be provided to the country in the form of an additional bank loan. About $200 billion Euros is owed to the Eurozone bailout fund and terms have been set such that no payments on this debt are required until 2023. Even with this assistance Greece is going to struggle to pay outstanding debt to the European Central Bank to the tune of 24 billion euros through the middle of 2018.
The situation has been created where more (interest earning) debt has been created in order to help out a country which can not afford the debt it has. If this were you or I, it would be getting another credit card to pay off the home loan we can’t afford to maintain. This has created a humanitarian issue within Greece. The government is now forced to spend the majority
of its GDP paying down debt instead of improving infrastructure or maintaining a the quality of life for its citizens.
The whole situation is quite interesting when just a little bit of history and global economics are taking into account. Some of the European countries are very different to others. Most European countries, particularly Southern ones, need a weaker Euro to reduce prices and increase competitiveness for their products on international markets. They need money to be created to weaken the Euro in order to increase investment, wages and consumption. Other countries flourish in a strong Euro economy such as Germany. Creating additional debt would potentially inflate the value of the Euro and be detrimental to the German economy.
What Greece needs is to have part of its debt forgiven, not more debt to take on. The hard line country not permitting this is Germany, which is a very hypocritical manoeuvre. Following WWI Germany was ordered to pay 132 billion gold marks to the allies, 85% of that debt was forgiven. Following WWII Germany was only ordered to pay $5.2 billion, which was equivalent to 32% of the German annual exports. As well in 1953, on the verge of collapse after WWII Germany’s debt was reduced from 39 billion marks to 14 billion debt and one of the countries that agreed to this debt relief was Greece.
Greece is a long way from being out of trouble. This situation will continue to make headlines. Only time will tell the final outcome of the nation of Greece and what its impact will be on the rest of the EU.